Dollars and Senseless

Click the below link for musings about the stock and bond markets.

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Stocks, etc.

The stock markets lately have been quite volatile.

That’s a good thing — for long-term stock buyers, that is.

Throughout history, periods of extreme volatility have presented the very best long-term buying opportunities.

Read “Wall Street on Sale,” by Timothy Vick. Be guided accordingly.

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For people at or near retirement age, however, gyrating stock markets understandably tend to cause bouts of nervous twitches if not projectile vomiting. If you fall into that category there’s an extremely important question you need to ask of yourself: Why are you invested in stocks?

When you’re at or near retirement you need income, safety of principal and protection from inflation, not capital appreciation. You need low risk, not the high risks associated with the stock markets. You need TIPS. Money market funds. Short-term bonds. REITs. Commodities. Preferred stocks. Not common stocks.

If you’re at least 62 years old, and you own your home free and clear, you should take out a HECM reverse mortgage and put gobs of cash into your pockets — money that you never have to pay back. You can cover the reverse loan with paid-up and level-term life insurance, that way your heirs will take the property free and clear upon your passing. In the meantime, you can take your cash lump sum and put it into a money market fund. Or perhaps split it in thirds between a money market fund, a TIPS fund, and a short-term corporate bond fund. BTW, depending upon where you live a reverse mortgage can put upwards of $300,000 cash in your pocket — again, money that never has to be paid back.

Moral of the story:

Asset allocation is not merely academic theory. It’s something you need to know in real life.

Bonds

Speaking of fixed-income investments, I like TIPS for this market environment. With the Fed having jumped the shark it’s beyond doubt we’ll be seeing inflation over the next several years. TIPS are good inflation plays, without the volatility of the materials and commodities markets.

I don’t like regular T-Notes, unless we’re talking about extremely short durations. Keep in mind interest rates and bond prices move in opposite directions and the fundamental rule of investing is to buy low and sell high. I liked T-Notes on the buy side a few years ago — when the Fed was tightening — but now T-Notes have to be at or near a top. How low can the Fed go with rates? Zero??? Not bloody likely. Buying T-Notes now is akin to buying at the height of a bull market.

I don’t like corporate debt. The risk spreads are way too narrow, unless you’re talking about the financial sector, in which case I’d rather make value plays on beaten-down common stocks, e.g., Citigroup and WaMu.